Should we be worried about dynamic pricing in retail?
March 18, 2019
March 18, 2019
Ever go to tell a family member or a friend about a great deal you found online, but when they go to buy it too, it’s no longer there? Or maybe it costs way more than you paid for the same thing?
While you got a great deal, what you’re experiencing is the phenomenon known as “dynamic pricing” or raising and lowering prices many times a day, a week or a month to drive sales but still ensure a consistent profit. This is often paired with what is called “personalized pricing” or “cohort pricing” where each shopper gets their own price for a product – what’s my price isn’t yours and vice versa. These are marketed to consumers as a benefit – deeper discounts just for you — but in the end, may actually end up benefiting the retailer at your expense.
One paper from MIT’s Sloan School says that “Implementing DP can improve revenues and profits by between 8% and 25%.”
So if everyone is saving, how are retailers making money? In the case of things like groceries, people tend to buy the same items over and over again. Since you’re not the only shopper, companies like Amazon sometimes charge one shopper triple what another one pays for the same item.
Companies are able to get away with doing this because as customers, we don’t actually have a single price we’re willing to pay, we have what’s called a “latitude of price acceptance.” That’s a band of prices—from a steal to a little pricey—that we’re willing pay for an item. According to McKinsey & Co., that price variance can be as much as 17% , which is a lot of extra money to be made if you move to the top of the band.
The Impact of Artificial Intelligence
While price fluctuations aren’t new and dynamic pricing has been around since the 1980s, having those changes determined by Artificial Intelligence, or AI, is uncharted territory. As retailers battle it out to find that exact pricing sweet spot that maximizes both sales and profits, evolving technology raises concerns about what the effects are on both consumers and smaller businesses when large companies like Amazon use AI and algorithms to enhance profitability with little oversight.
Data is King
AI-driven personalized pricing relies on tracking and retaining information on customer behavior. That means whoever has the most information on you has a competitive advantage over their rivals. Beyond the security and privacy concerns of big data, this also means that the playing field is tipped even further in the favor of large companies like Amazon, who reached over 100 million Prime members in the US in January.
According to Amazon’s Privacy Notice page, the retail giant collects and analyzes everything from purchase histories and products viewed or searched for to reviews, wish lists and length of visits to certain pages. This huge pool of data on its customers’ shopping habits can help Amazon better understand what shoppers are looking for, what they buy and what prices they are willing to pay.
Increasingly, company leaders are recognizing that a dynamic pricing strategy supported by big data and artificial intelligence (AI) can help them gain a competitive pricing advantage over rivals.
With deep insights into the personal preferences and online behavior of about a third of the US population, not even including the shoppers who are not Prime members, Amazon isn’t just a retailer, but a data company.
Pricing based on who you are
While the law prohibits assigning prices based on protected characteristics—like race or gender—personalized pricing is by its nature nontransparent, meaning you can’t see everyone’s prices. That means you may not know that women, for example, are charged more for the same item, because the only price you see is the artificially high one. If we know companies have information on your race or gender, and we also know the AI-driven dynamic pricing responds to your unique set of data and characteristics, how would anyone know if the law was being violated?
What comes next?
We don’t know—and we’re not sure anyone else does either. But we also believe that honesty and transparency are essential. Lawmakers should be wary of technology evolving faster than our laws, or the ability to enforce them, can keep up with, especially if that technology is skewed to benefit powerful retail industry players like Amazon.